As angel investors we always seek ways to improve our investment odds. Through the years I’ve uncovered one sure bet: Invest in companies that bring value to strategic buyers so that the price of the acquisition increases.
To do this, it’s first important to understand what a strategic buyer is. A great person to ask is Craig Mullett, an active Angel Capital Association member and investor with the Angel Investor Forum in Connecticut, and co-founder of AngelHub in his native South Africa. Mullett isn’t your average angel. He’s also founder of Branison Group LLC, which provides buy-side merger and acquisition advisory services to business owners, corporate executives and private equity groups. Mullett says, “The vast majority of startup buyers out there are strategic. They want to buy your company because it can help accelerate their growth and build their own value quickly.”
That makes sense. We live in a challenging business environment. The bulk of strategic buyers are large, public companies and they have considerable quarterly pressure on earnings. More and more are looking for innovations in startups that fit their products and strategies rather than that developing new products and innovations internally.
So how can you help to make the startup companies in your portfolio more attractive to a strategic buyer? Mullett says, “As many serial entrepreneurs do, you need to be good at identifying very early, the market gaps that exist and how the startup can help close those gaps.” As an angel investor you can help your portfolio companies achieve the highest acquisition price by guiding them to think strategically and prioritize what strategic buyers care most about.
Generally, the strategic buyer cares most about these four things, in this order of priority:
- Products and technology: First and foremost, strategic buyers are looking for products or technology that are a good fit for their own product lines. Maybe this closes a gap – or enhances the way customers can use their products. The key is to ensure that any intellectual property is solid. Because patents are a double-edged sword and can easily become a “license to litigate,” it is important to ensure that key technologies have issued patents that properly protect the company. It costs a lot to defend a patent–usually more than a small company’s wherewithal. Mullett has seen some new businesses handle this by including a patent counsel on the Board of Advisors.
- Market and customers: The purchase price in an acquisition is often related to how much traction the company has in its market. It’s important to avoid having all your eggs in one basket – no customer should account for more than 30 percent of the startup’s revenue. Instead, strategic buyers covet companies that have a broad customer base, with long-term contracts and recurring revenue. One tip as your startup is signing up customers is to pay attention to contractual terms. For example, Mullett has seen negotiations stop cold when customer contract terms could not be -assigned on acquisition.
- Leadership and people: I’ve written before about betting on the right CEO, and many strategic buyers agree. They know that people make it all happen. Those that are acquiring the company as a whole (as opposed to assets like products, IP or customers), will be looking to see that the leadership is open to transition and to their proposed role in the buyer firm. Don’t forget to pay attention to how options and bonuses are structured too. Closing a deal will be far easier if stay bonuses are in place or options incentivize staff to stay and continue working.
- Operations and facilities: You may wonder, what can a startup offer a strategic buyer in terms of operations or facilities? The most common reality is that these areas are more of a check box that influence the value of deal. For example, you need to ensure that the startup can easily plug into the acquirer’s operations. Showing solid organization with accurate coding libraries and clearly documenting processes will decrease the risk for a strategic buyer.
With each of these areas, strategic buyers will base the value of your business on one key factor: How fast will this help us grow revenue? Clearly, the fast route to being sold at a high multiple is to have as many of these attributes as possible in place for a strategic buyer. When that happens the win-win will be bigger and better for all.